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Audit firm retendering and rotation

Boards and General Management

European Audit Committee Leadership Network, January 2014

On 22 November 2013, members of the European Audit Committee Leadership Network (EACLN) met in Rome to discuss audit firm retendering and rotation, among other topics. The guests for this session included Professor Maurizio Dallocchio, professor at SDA Bocconi School of Management and former audit chair of the European Investment Bank, and Dr Maurizio Lauri, chairman of the board of statutory auditors at UniCredit.

This document summarizes the key points that guests and members raised in the discussion, along with background information and perspectives that guests, members and other experts shared before the meeting.

In the current public-policy environment, the issue of audit firm retendering and rotation is of increasing interest to audit chairs, who are concerned about the challenges of managing a successful audit firm transition for their companies and the audit profession more generally. Members looked to Italy, which has required rotation every nine years since the 1970s, as an emerging source of best practice in managing audit firm transitions. The discussion in Rome focused on the following topics:

Pressure to retender or rotate the audit is increasing
Policymakers are beginning to require retendering and rotation of the audit firm at specific intervals. Regulation on mandatory audit firm rotation is in the final stages of the European Union’s legislative process and is likely to become law in 2014. Meanwhile, the Netherlands has enacted legislation imposing an eight-year rotation period effective January 2016, while the UK Competition Commission has published a final report requiring FTSE 350 companies to retender their audits every 10 years. Members also mentioned other triggers for retendering, including pressure from some investors and the expectations of the public in general.

Companies and boards should manage the retendering and rotation process carefully
Guests and members noted that the retendering process involves input from various internal groups, though one group or individual typically takes the lead (increasingly, the audit committee, or, in Italy, the board of statutory auditors; in Italian, the collegio sindacale). While audit fees and the independence of the firm in terms of non-audit services are important considerations, the selection criteria used to evaluate audit firms also encompass the quality of the staff, including their knowledge of the firm’s sector, the character and authority of the senior partner, and the firm’s processes for coordinating operations across multiple national jurisdictions and resolving different points of view on technical matters. Planning for the transition is critical and may even include evaluating the audit firm’s transition strategy during the retender process. Building in sufficient overlap between the two firms allows for better transfer of knowledge, and effective dialogue and review of working papers should be encouraged. Management and audit committee support for the new auditor also plays an important role, with transparency and openness the keys to building a successful relationship.

Retendering and rotation will have significant effects on the audit profession
In addition to presenting challenges for companies, mandatory retendering and rotation is likely to have a major impact on the audit firms and the broader audit profession. Guests and members were concerned about the potential consequences resulting from downward pressure on audit fees. They saw reduced competition as a rise in retenders strains the ability of audit firms to respond to every tender request. Negative impacts – such as the cost of mounting thousands of tender responses – may make the audit profession increasingly unattractive to top talent, further undermining audit quality.